Oil Markets Are At A Stalemate

U.S. shale production is soaring as the oil rig count once again ticked up this week, but OPEC's high compliance and the continued crisis in Venezuela has left oil markets at a stand still.

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Oil prices see-sawed over the past few days, but look poised to close out the week flat compared to last week. High OPEC compliance and falling Venezuelan production more or less offset surging output from U.S. shale and an uptick in inventories.

U.S. oil production tops 10 mb/d.The EIA said this week that U.S. oil production surpassed 10 mb/d in November, just shy of the all-time high set decades ago. There was a huge increase from October, a monthly increase of over 380,000 bpd. The surging output is clear evidence that the shale industry is ramping up production at an amazing pace, and could spoil OPEC’s plans to balance the market. Meanwhile, U.S. crude inventories also jumped last week, the first time that has occurred in several months.

Goldman: Brent to $82 in 6 months.Goldman Sachs dramatically overhauled its forecast for oil prices this year, stating in a research note that the market is tightening much faster than expected. Moreover, the investment bank said that OPEC’s objective of bringing down inventories to the five-year average has probably already occurred. “The rebalancing of the oil market has likely been achieved, six months sooner than we had expected.” The bank predicts that OPEC will stick with the cuts for the first half of the year, which could tighten the market more than the group intends, and push prices up above $80 per barrel by the summer. From there, OPEC might gradually ratchet up output.

OPEC compliance rate at 138 percent. OPEC maintained high levels of compliance with the production cuts in January, with its compliance rate at 138 percent according to Reuters. However, that is largely the result of the meltdown from Venezuela, which offset the gains from Saudi Arabia and Nigeria.

Venezuela’s production could fall 700,000 bpd. Barclays estimates that Venezuela’s production could fall by 700,000 bpd this year, averaging 1.43 mb/d. The crisis continues to erode the country’s production base, a drop off that accelerated at the end of 2017. Meanwhile, U.S. Secretary of State Rex Tillerson seemed to offer some measure of support for a military coup in the country. "There will be a change in Venezuela. We want it to be a peaceful change," Tillerson said on Thursday at the University of Texas-Austin, according to Argus Media. "We have not advocated for the regime change or removal of President Maduro," he tried to clarify. "Maduro could choose to just leave, that would be the easiest. He has friends in Cuba and they can give him a nice hacienda on the beach and he can have a nice life there."

Shell takes 9 blocks in Mexico offshore auction. Royal Dutch Shell (NYSE: RDS.A) won 9 of the 19 offshore blocks awarded in Mexico’s deepwater auction on January 31. Shell is already the largest producer in Brazil and it is making a play to dominate Mexico’s offshore sector as well. From Mexico’s perspective, the auction was a success, and could garner as much as $93 billion in investment. The auction was also important because there are fears that Mexico’s election later this year might usher in a government less favorable to the industry. The results suggest oil companies are not deterred by the political risk.

Chesapeake lays off 13 percent of workforce. Chesapeake Energy (NYSE: CHK) laid off 400 workers, or about 13 percent of its workforce this week. The indebted natural gas driller said the layoffs will mostly occur at its Oklahoma City campus and were the result of asset sales over the last few years.

Wells Fargo: No bull market for commodities.Wells Fargo warned that optimism about rising commodity prices might disappoint investors this year. In fact, the down cycle could last for a long time to come. "We expect bear market dynamics (over-supply and range-bound prices) to dominate commodities for the next five to 10 years," Austin Pickle, Wells Fargo investment strategy analyst, wrote in the note.

Royal Dutch Shell triples profit in 2017. Royal Dutch Shell (NYSE: RDS.A) reported strong profits in the fourth quarter, with earnings on a current cost of supplies (CCS) – similar to net profit – of about $16 billion, excluding tax charges. That was roughly double the figure from a year earlier. Analysts were a bit disappointed because cash flow came in lower than expected, but nonetheless, the figures are a sign of an ongoing rebound for the oil majors, who are now earning about as much money at $60 per barrel as they were years ago at over $100 per barrel.

Deepwater discoveries.Several deepwater discoveries were reported in the past week, evidence that the offshore sector is gaining momentum. Shell said they made a potentially huge discovery in the Gulf of Mexico, a project called “Whale.” Just hours earlier, Chevron (NYSE: CVX) said it discovered the “Ballymore” field off the coast of Louisiana. Meanwhile, BP (NYSE: BP) announced a discovery in the North Sea.

Dutch gas field could be cut in half.The massive Groningen gas field could be forced to cut production once again over fears of earthquakes. Reuters reports that the Dutch government could order the field’s operators to slash output by half to 12 billion cubic meters per year “as quickly as possible” to limit the risks of earthquakes. Once the largest source of gas for the EU, the field is down from peak output at 54 bcm in 2013.

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You have to love the way folks manipulate the price of oil upward. Think about it. Oil is no longer scarce. With new technology cutting cost of regular and shale oil production, and the time it takes to get oil to the market we've had a glut of oil for several years. The massive glut of oil has only been reduced to a glut because OPEC/Russia have idled million of BPD is a desperate attempt to balance the market as they say. Yet all of that has still left the world with a glut, just a smaller glut. However, the manipulation and massive idle capacity has pushed up prices even though there is no reason a barrel of oil should sell for more than $40 a barrel except for the manipulation. That actually as been good. As oil moved up into the $50s and now into the $60s U.S. shale production of oil and gas has boomed. The U.S. went over $10 million BPD last year, and with oil at $60 and cost below $40 the U.S. oil industry is in overdrive. That's fantastic for the USA, but it means even as OPEC/RUSSIA desperately struggle to idle enough capacity to push prices up the create a boom in of production in the USA that has and will continue to exceed all expectations, and other countries are also going to get into the shale oil and gas boom. Oil is simply not that scarce anymore and at $65 and higher for WTI the gold/oil rush is on. Yes Venezuela is a basket case but it has to produce oil or its people starve although the corrupt socialist don't much care, but they do like to pad their pockets. In any event its clear at some point now that there could be an explosion. Maduro and his corrupt communist Gov may end up handing from lampposts by their heels given the damage they've done to Venezuela. That could disrupt Venezuelan oil, but there is many times Venezuela's capacity idle, strategic reserves are full, and the USA is adding production that will add more capacity than Venezuela produces this year.
Meanwhile renewables like Solar and Wind have a new lease on life. They are more competitive with oil at $65 for WTI especially since they are heavily subsidized. So they are in a position to continue to grab more market share, and as they have a larger share their costs are falling like a rock. Higher oil prices is giving them exactly what they need. Scale to reduce cost and stable and rising market share. High oil prices mean that the day when we look up and realize the technology and cost of renewables is better than oil is approaching faster than people think, and we already know electric car cost are dropping and technology is getting better, and the day when huge reduction in gasoline requirements start to happened is almost upon us. The USA has the best of all worlds right now. We get to go all out making billions on high oil prices and increasing our share of the market while OPEC/Russia sit on their cheaper easier to get oil. The frenzy of collusion to push oil prices higher continues but every dollar increase means the era of oil will be over.

the masked avenger on February 02 2018 said:

Opec begins to crumble.

Mamdouh G Salameh on February 02 2018 said:

The markets may be at a stalemate but we know who will emerge as the ultimate winner.

All through 2017 there was a tug of war between the oil market fundamentals supported by the OPEC/non-OPEC production cuts and US shale oil production trying to cap oil prices at $60/barrel. OPEC triumphed over US shale oil when oil prices broke through the $60 barrier. The $60 became the floor for oil prices.

A similar tug of war is continuing into 2018 with US shale oil production trying to cap prices at $70/barrel. We can easily project the end result. Oil prices will break through the $70 barrier probably rising to $75/barrel. The $70 will become the floor for oil prices in 2018.

Its a little hard to believe that the US is producing 10 million bbls per day when Exxon Mobile reported production fell 3 percent last quarter. If you look at the Railroad Commission of Texas report it does not support the EIA's claim. The EIA published that oil imports declined this week from last weeks weekly oil report. According to the EIA's data they reported 8.4 million bbls avg per day imported this week and prior week imports of 8.1 million bbls avg per day. Sounds like there is some internal problems in that department as well as the myriad of others.